1 share of No-Brainer Energy to buy right now for less than $200

Looking for profitable energy stocks? See what Warren Buffett owns. He has been a major energy investor for decades, investing in a wide range of verticals, everything from upstream and refining to large-scale renewable energy projects. Currently the fifth-largest position in its publicly traded portfolio is an energy company that everyone has heard of — and there’s a great investment case to be made right now.

Ensure a reliable return of over 5% for shareholders

After a brief correction, now looks like an excellent time to buy Chevron (NYSE: CVX) stock. The dividend yield is currently around 4.4%. But when you add in the company’s massive share buybacks — the company is authorized to buy back up to $75 billion in shares — the total shareholder return exceeds 5%.

Warren Buffett is clearly a big fan of Chevron’s capital allocation strategy. his holding, Berkshire Hathawayowns 118 million shares worth $18.5 billion — about 6.4 percent of Chevron’s total value. Berkshire has been a net seller of late, but that’s likely due to a massive investment in another oil and gas company: Occidental Petroleum. It’s likely that Buffett simply doesn’t want to overexpose his portfolio to a single sector. But he’s clearly still an oil bull — two of his top six positions are now oil and gas companies.

Over the past two decades, Chevron’s integrated approach has resulted in impressive financial performance. Return on invested capital, or ROIC, a measure of how well it uses capital to generate profits, has averaged more than 10% over that time period. And healthy free cash flow has allowed it to sustain a sizable dividend while steadily reducing its share count. Despite this, the company is currently trading at a respectable free cash flow yield of 6.6% — well above its long-term average.

Chevron had beaten the S&P 500 over the past two decades until the recent oil price correction. Over the past 12 months, the price of oil has fallen from $90 a barrel to about $70 — the direct cause of Chevron’s share price decline. But if you’re bullish on oil prices here, now could be a great time to initiate a position.

If you’re bullish on oil, Chevron stock is a no-brainer

Even though Chevron has exposure to both midstream and downstream assets — which gives it some insulation from oil price volatility — it still makes most of its money from upstream operations. That means, over the long term, you have to be bullish on oil prices to justify an investment in Chevron.

Even if oil prices remain flat, there is still an investment case for Chevron. That’s because it has been able to economically replace its reserves and create enough operational efficiencies to significantly improve its profits per barrel, even without the help of rising oil prices.

From 2015 to 2019, for example, oil prices averaged below $60 per barrel. During this period, Chevron generated profits per barrel of about $7. However, over the next few years, management expects to produce profits between $10 and $11 per barrel. And that’s assuming oil prices are at $60 — down more than 10% from current levels. These bullish profit estimates come even as Chevron pushes to expand production by about 20% through 2027.

If you’re bullish on oil, investing in Chevron is a no-brainer. Over the next few years, production should increase and so should profitability, all while the company returns billions of dollars to shareholders through dividends and share buybacks. And with a challenging geopolitical climate, there is upside to oil price growth as well, while mitigating downside risk, given Chevron’s diversified assets that can generate positive cash flows even if market conditions temporarily worsen.

Should you invest $1,000 in Chevron right now?

Before buying Chevron stock, consider the following:

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.

1 No-Brain Energy Stock to Buy Right Now for Under $200 was originally published by The Motley Fool